John Bogle column in WSJ: A Crisis of Ethic Proportions

February 26, 2010
John Bogle, the founder of Vanguard, has a reputation for integrity that seems well-earned.  His column in Monday's Wall Street Journal, aptly entitled "A Crisis of Ethic Proportions," offers important thoughts on what he considers "a broad deterioration of traditional ethical standards" and the need for what he calls "a fiduciary society." 

Frankly, I am not sure that I agree about "a broad deterioration" in ethical standards.  There have always been less ethical and more ethical people, and there have always been "pendulum swings" in the value that society attaches to adherence to high ethical standards.

There can be little question, however, but that recent years saw a rise in the tendency to measure success "in monetary terms." Too frequently, managers have been willing to separate "success" from principled behavior and adherence to traditional standards of professional conduct.  This has been especially the case with those charged with responsibility for managing other people's money and, I fear, in the legal and accounting professions, where adherence to standards and principles has an especially important role in upholding societal values.

The result has been what Mr. Bogle recognizes as "a failure of capitalism," which is no small statement.  Or, as Alan Greenspan said in his testimony before Congress last October, "a flaw in the model that I perceived as the critical functioning structure that defines how the world works."  Mr. Bogle quotes an unnamed journalist as noting, "that's a hell of a big thing to find a flaw in." It's also a "hell of a big...flaw" stated in the convoluted way that is uniquely Alan Greenspan.

As Mr. Bogle wrote, "The managers of our public corporations came to place their interests ahead of the interests of their company's owners."  Too often, short term profits (and this year's "bonus') seem to have ranked ahead of what should have been foreseeable longer-term interests of the corporation.

Mr. Bogle says that we need to create "a 'fiduciary society,' where manager/agents entrusted with managing other people's money are required -- by federal statute -- to place front and center the interests of the owners they are duty-bound to serve."  In other words, tomorrow's managers must do what most "old school" managers would have seen as their duty, their professional responsibility. 

What Mr. Bogle recognizes, and what Alan Greenspan came to recognize to a point I think, is that markets are not always "self-correcting." Laissez faire economics, where greed is "too unchecked" by either social norms or government regulations, doesn't lead to long-term economic success.  Instead, it led to a bubble economy and a credit crisis of epic (and ethic) proportions.

The Better Business Bureau, in our promotion of martketplace trust, knows that trust and ethics are the foundation of free enterprise and capitalism.  We have a special role in helping maintain the right balance between regulation, self-regulation and free markets.  I'd call the 'free markets' part of this equation 'greed' in the good sense, that capitalism and free enterprise depend on people operating in their own interest.  But this self-interest must be constrained or 'checked' by recognition of the public welfare, the 'common good,' and especially, as Mr. Bogle notes, by recognition of duty to others, especially to those whose money it is that managers are entrusted to manage.

A well-functioning economy, as with a well-functioning society, must have a high regard for ethics.  Sometimes people forget this.  In this case, it appears to have taken a major economic event to bring us back to reality...and to a recognition of important principles.